Russia Economic Monthly. July 2021 - High Inflation to Elicit Response from CBR

Inflation has been elevated since last fall. Although it slowed in June, it remained well above 4% in annualized terms. Meanwhile, the economy is enjoying a robust recovery, which has caused us to revise our full-year GDP growth forecast. > We now expect a 100 bp hike on July 23. Inflation reached 0.7% m-o-m in June, a very high level for the month. It remained elevated in early July, although seasonal fruit and vegetable deflation has kicked in. Given the recent inflation trends, we expect the CBR to remain hawkish.> Recovery proceeding strongly. Basic sector output climbed 14.1% y-o-y in May, supported by the low-base effect (output fell 9.2% y-o-y in May 2020). Notably, output rose 1.3% m-o-m after seasonal adjustments. Output has already surpassed the pre-pandemic high of 2H19. > Labor market improving. Unemployment fell to 4.9% in May from 5.2% in April. The labor force has been expanding in 2021 (thanks to changes to the pension reform passed in 2020). Net migration has begun improving, which will be positive for the disinflationary process as it will improve the employment situation in segments that depend on migrants (such as agriculture, construction, catering and hotels). > We now project 4% GDP growth this year. GDP growth appears set to come in at 10% y-o-y for 2Q21. This is higher than we had expected and has prompted us to upgrade our forecast for the full year to 4.0% from 3.6%. Our view on 2022 remains unchanged: we see the national projects boosting investment activity, and we project GDP growth of 3.2%.